10:41 am

Tue December 4, 2012

Small Businesses: "Show Me The Credit"

And now to matters of personal finance. We all remember the financial crisis the country faced four years ago. The numbers suggest that the economy is improving slowly but surely. Interest rates are at near record lows, but our next guest says - and this is something you might have experienced yourself - a lot of people are still having a difficult time getting access to credit, especially small-business owners and home owners with less than perfect credit.

Joining us once again is Bloomberg Businessweek contributor, Roben Farzad. Roben, welcome back. Thank you for joining us once again.

ROBEN FARZAD: Thank you. How are you? How are you, Michel?

MARTIN: Great. Thank you. Now, Roben, you've been telling us that a lot of small businesses and average people, including people with good credit, cannot get access to these low interest rates that are so widely advertised. Why is that?

FARZAD: This is up to the banks. Small businesses are dependent on the banks. You can go back to "It's a Wonderful Life." I mean, that's the institution that kind of has its ear to the ground, locally. Ultimately, a small-business owner is that the mercy of banks, which have increasingly been consolidated and a handful of banks in most cities are making the majority of decisions.

MARTIN: And you're very concerned about this. I mean, why is this such an important issue for the economy?

FARZAD: Well, small businesses, they're the indicator species for the health of the economy. You know, they represent half of private economic activity and half of the private workforce in our country and you're seeing small-business optimism at recessionary levels.

Now, there are lots of things behind it. Obviously, sales have been lagging. Small businesses, mom and pops are worried about the effect of Amazon and Wal-Mart. There's the fiscal cliff. There are concerns about health care and taxes, but if they don't start feeling their oats, they're not going to hire and you're going to see the economy chronically mired in the higher unemployment that it has right now.

MARTIN: Now, we reached out on Facebook to ask small-business owners what their experiences have been and we got a lot of responses. Most of the people who replied told us that banks were not willing to lend money to them for a variety of reasons. Here's just one of the responses that we got. This was from Doug Hamilton from Oxford, Ohio, and this is what he told us.

DOUG HAMILTON: I went to five different banks with eight years of positive track record in my industry, which is specialty bicycle retail, looking for a modest line of credit for my burgeoning custom bicycle wheel business, which has had steady increases in sales throughout the recession. I was told everything from, our underwriters frown on commercial loans to, sure, no problem. We'll loan you as much money as you can put up for collateral. In short, no was the only answer I received.

It has been very disappointing, to say the least. We could hire at least three more people in my shop if only the banks would act grateful for being bailed out at taxpayer expense and take a chance on the well-run small businesses in their communities.

MARTIN: You know, what about that point that Doug makes? You know, the bailout money went from the taxpayers to these large institutions and prevented quite a few of them from going underwater after the financial crisis in 2008 and 2009. And so he's asking, where's the evidence or is there any evidence that that money is actually - you know, where is that money, I guess is his question. Why isn't he getting any of it?

FARZAD: There isn't any evidence, truly, I think, en masse, and the problem is kind of really threefold. One, you never had the Treasury Department, when it was pushing through the bailout, actually hold these bank executives' hand to the fire and say, we're going to give you this money. You're going to take it and you'd better darn loan it out, or else. It was more kind of do it on good faith.

And, in fact, a lot of them turned around when they were profitable again and paid back their bailout money. They started paying dividends back to shareholders. But then again, you have the government telling all of these banks, go out there and heal thyself. Repair thy balance sheet. And you do that by not making risky loans like so many of them did during the subprime crisis.

On the other hand, point number three is, if banks not only got that bailout money, but are paying you and me, you know, hundreds of millions of Americans, nothing on their savings and checking deposits, it behooves them to turn around and loan that money out on reasonable terms, but they are saying that we are kind of once bitten, twice shy. We're not going to do anything near the stupid lending mistakes that we did in the early part of the last decade.

MARTIN: From a bank's perspective here, the National Federation of Independent Businesses released its Small Business Optimism Index for November. They surveyed small-business owners on how they say they feel about the future of their businesses. The indicators are trending upwards. The NFIB still describes the results of the survey as, quote, "solidly pessimistic," and just one other indicator that Thomson Reuters PayNet Small Business Lending Index does indicate that lending is inching upward. It's not nearly as bad as it was in 2009 at the, you know, height of the recession, but it's not back to the levels that it was prerecession, but it's inching back upwards.

So how do you respond to that?

FARZAD: Well, something has to break this cycle, or this impasse. Banks are saying that we don't see the momentum out there. We don't see small-business optimism or sales or a trajectory enough for us to go out there and loosen the purse strings. Small business owners are saying, if we can't get the credit, we can't hire more people. We can't bring the unemployment rate down. We can't stimulate the economy in a way that will bring about sales and the virtuous cycle that the Federal Reserve, after all, which keeping rates at near zero for four years, is trying to stoke.

So that has to break, especially in light of the broader, huge bull market you've seen in bonds for corporations and municipalities and when investors have thrown a trillion dollars in terms of fixed income for corporations and municipalities, you'd think at least a good chunk of that would roll over into banks and small businesses. And so the hope is that this will finally reach a tipping point.

MARTIN: If you're just joining us, I'm speaking with Roben Farzad. He's a contributor to Bloomberg Businessweek. We're talking about why it is that small-business owners and homeowners are still having difficulty getting access to credit.

You know, Roben, we actually had an interview last week with Stephanie Clifford from the New York Times, who reported on how people are getting around the traditional banks for loans and credit. Big box stores, like Home Depot - the Home Depot and Sam's Club are offering financial services now and some of these retailers are even offering small-business loans. Now, the people who've gotten these loans say that, often, the terms are more restrictive. They can only spend it in certain places, like in the store itself. They can't get as much of a credit line as they would like. But do you think that this is what's going to break the logjam?

FARZAD: Yes, Michel, and then some. Not only are retailers realizing that there is an impasse that they need to break. In addition, earlier this year, President Obama signed the Jumpstart Our Business Startups Act, which allows for smaller companies to raise up to a million dollars in equity through crowd funding. I mean, you've heard of Kickstarter. The internet is disrupting so many models the way Amazon is killing Best Buy, the way, you know, shoe retailers have to deal with Zappos.

You can't help but imagine that, in short order, the internet is also going to disrupt the traditional model of lending, which banks have monopolized for time immemorial.

MARTIN: You've been telling us how difficult it is to get a small-business loan. You're saying that the banks are sitting on a pile of cash that they are not lending out, but investors are buying up bonds from large corporations and municipalities instead. And you're saying that this could lead to another market bubble. Could you talk about why that is and what your concern is about that?

FARZAD: Investors and depositors are so starved for yield with the Federal Reserve at interest rates at zero for four years that they're going out there and giving money to corporations, both creditworthy corporations and kind of more junky corporations and municipalities at record low rates because, you know, when you compare it to a 0.5 percent or 0.25 percent you get on a savings account, something like 2.5 percent from a corporation for a 30-year loan, you know, you're willing to fork that over to them. And that sets up something that's potentially catastrophic. If people lend first and ask questions later, you see something akin to the subprime bubble. Is that happening with corporations? Is that happening with municipalities? That's really the fear as 2012 - a record year for the bond market comes to a close.

MARTIN: Roben Farzad is a contributor to Bloomberg Businessweek. He joined us from member station WCVE in Richmond, Virginia. Roben, thanks so much for joining us once again.